A pace of oil price declines over the past seven weeks could be only matched by the 2014 bloodbath caused by the US shale revolution. That understandably sounded alarm among key producers that will meet on Thursday to discuss their response. Can they convince investors that the worst is over?
- OPEC to discuss output cut amid price declines
- The Saudis would like to cut aggressively but face pressures
- Markets see a cut of at least 1mbd
- OIL above the key support zone
Why oil prices slumped by 30%?
Let’s start from the fact that a rally that led Brent (OIL) close to $90 was fueled by speculation that sanctions on Iran can result in a major deficit on the market. This proved to be wrong once Donald Trump granted waivers for 8 importers and (crucially) the Saudis ramped their output under the US pressure. Suddenly there was too much oil and traders had to scale back their bets in an aggressive fashion. On top of that, the US shale output expansion is unabated and this has resulted in a long series of inventory increases.
Can the OPEC change the situation?
There’s a perception that the cartel faces too many conflicts to produce a meaningful cut. Let’s consider the Saudis – taught by tough lessons from 2015 they’d love to cut output aggressively to ramp up prices but they fear the US reaction amid a controversy of their journalist murder. Other examples are abundant – Russia said it would back the cut but its companies want to sell more oil from their new fields. Having said that the OPEC showed in 2016 that it still could impact the market and a decisive reaction now would be the first step. Markets are looking for a cut of 1 to 1.4mbd (million barrels per day) for 2019 from OPEC and Russia – a cut of less than 1mbd or a cut without a specified number could end in a disappointment.
Technical analysis: OIL at the key level
The OPEC meeting takes place at the very important time from the chart perspective. Prices literally crashed from the 4 year high of $86.70 and stopped at the key support marked by a consolidation from early 2017. Although the lower limit of the channel has been broken this might be less important for as long as prices could climb back into it. Should a rebound occur, the key resistance will be seen at $70.50.